The year is rapidly drawing to a close, which means it’s highly likely that you will now hold completed financial statements for your SMSF. If your balance is over $1.6 million, the first thing you may notice is that your imputation credits refund is down from last year.
This is due to the change in rules made by the Turnbull Government, which restricted the amount that could be held in tax-free pension mode to $1.6 million, leaving the rest of the fund’s earnings to be taxed at 15%.
When trustees no longer need to worry about the cap
The next thing you might discover is that the $1.6 million that was your Transfer Balance Cap (TBC) at 30 June 2017 has now grown. It could easily be worth as much as $1.7 million if your fund earned, say, 7%, while you drew the mandatory pension of 4%.
This situation has triggered a few emails asking what the trustees of the fund should do. Will the TBC now stay at $1.7 million or will it go back to $1.6 million if the amount in pension mode drops as a result of bad performance or increased pension drawings in the current year?
Superannuation guru Monica Rule has good news for you. She tells me that your TBC is no longer relevant, provided the documentation was done properly as at 30 June 2017. As long as your fund did the paperwork correctly on that date, the fund trustees no longer have to concern themselves with the $1.6 million TBC.
Thus, there is no limit to what your super in pension mode could grow to if you had excellent returns, way in excess of the compulsory drawdowns. And there is no penalty if, for any number of reasons, the amount you hold in pension mode drops below $1.6 million.
Continue to draw minimum
But one factor is critical. If all or part of your fund is in pension mode, you are required to draw a set percentage of the balance of the fund that was in pension mode at 30 June. The factor is 4% for anybody under 65 and rises progressively to 14% at age 95 and above.
| Age | Minimum pension drawdown factors |
| 55–64 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| 95 or older | 14% |
For example, if you are aged between 65 and 74 you should be withdrawing at least 5% of the previous June balance each year. Therefore, if your balance was $1.6 million at 30 June 2017, you should have drawn $80,000 in pension for the year ended 30 June 2018. However, if your financial statements now show that your TBC has become $1.7 million, you will need to increase your drawdowns in the present year to $85,000.
This is a further example of the complexity of our superannuation system, and the dangers for people running SMSFs who don’t get it right. Despite the penalties, which can be heavy, I am still amazed by the number of questions I receive from people who obviously don’t know what they’re doing. Often, they simply don’t know what they don’t know. This is an area where expert advice is critical.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. Contact him on noel@noelwhittaker.com.au